PRUBLEMS Answers to odd-numbered problems appear at the end of the book. Answers
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Question
PRUBLEMS Answers to odd-numbered problems appear at the end of the book. Answers to even-numbered problems and additional exercise Instructor Resources within McGraw-Hill's Connect (see the Preface for more information). s are available in the 1. a. What does it mean when cash flow from operations on a company's cash flow statement is negative? Is this bad news? Is it dangerous? b. What does it mean when cash flow from investing activities on a compa- ny's cash flow statement is negative? Is this bad news? Is it dangerous? What does it mean when cash flow from financing activities on a compa- ny's cash flow statement is negative? Is this bad news? Is it dangerous? c. 2. Braintree Corporation has $5 billion in assets, S4 bilion in equity, and earned a profit of $100 million last year as the economy boomed. SeniorExplanation / Answer
1.a. A negative cash flow from operations on a company’s cash flow statement means that the company has used more cash for running its day-to-day business operations than what it has been able to generate from running the business. A negative cash flow from operations is a bad sign since it means that the company requires external financing to run its operations. It could be dangerous if the company continues to have negative cash flow from operations as in the long-run the viability of the business venture itself maybe doubtful. Operations must generate a positive cash flow or a cash inflow which can be used to meet the company’s investing and financing outflows.
b. Negative cash flow from investing activities means that the company has utilized its cash for capital acquisitions or expansion purposes by purchasing long-term assets such as land, building, equipment, etc. or for purchase of long-term investments in debt or equity. This is not a bad sign as it could mean that the company is in expansion mode or is generating excess cash from operations which is being invested.
c. When the cash flow from financing activities is negative, it means that the company has repaid its long-term liabilities such as bonds payable and notes payable or it has paid dividends to its shareholders. This is also not a bad sign since it means that the company is running its business well and generating cash which it can distribute to its shareholders and also be used to repay its long-term financial obligations.
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